Rate hikes could halt asset bubbles, research finds
Tighter policy can work if savings fall or holdings of bubble asset decline, paper says
Raising interest rates can be an effective tool to deal with asset bubbles, a paper published by the Federal Reserve Bank of Chicago says.
On interest rate policy and asset bubbles by Franklin Allen, Gadi Barlevy and Douglas Gale, responds to Jordi Gali’s paper Monetary policy and rational asset price bubbles. In 2014 Gali showed that a policymaker who raises interest rates to rein in a potential bubble will only make a bubble bigger if one exists.
“One of the points Gali emphasises in his
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